Exchange Circuit Breaker Confusion

Well, the Flash Crash anniversary has come and gone with much commentary supplied by many market participants.  We have noted many times that we believe what the SEC and the exchanges have done to prevent another May 6th has amounted to just band aid fixes.  As evidence, we constantly point out the almost daily single stock flash crashes.  We also like to point out the confusing nature of the current circuit breakers and clearly erroneous trade policies.  For instance, Rule 201 short sale circuit breakers are enacted on any stock that drops more than 10%.  But single stock circuit breakers only apply to Russell 1000 stocks and certain ETF’s when they rise or fall 10%.  Now, this is not to be confused with the FINRA clearly erroneous trade policy which says that “erroneous trades will be broken if the last sale is 10% away from the reference price if the stock is$25.00 or less, 5% if the consolidated last sale is more than $25 and up to and including $50, and 3% if the consolidated last sale is more than $50. These percentages double during pre-open and post-close trading sessions.”  And if your errant trade was part of a multi stock event (more than 20 stocks), well then it must be at least 30% away from the reference price before it is broken.

Then there are the NYSE Liquidity Replenishment Points (LRP’s) and NASDAQ Volatility Guard circuit breakers which we won’t get into here.  Confused yet?  Don’t worry, most people are not familiar with all these different circuit breakers and just assume that since there was such a dramatic, confidence shaking event on May 6th, 2010, then the exchanges and the SEC must be protecting them now.  Well, as you can see from all these confusing circuit breakers, investors are still not quite protected.

The exchange cartel realized this and now has submitted a new proposal to the SEC (Read proposal here).  While they await the approval of what they consider the Holy Grail of circuit breakers, the Limit Up/Limit Down breakers, they have now proposed a new single stock circuit breaker.  The new proposal will halt all stocks (including non-Russell 1000 and all other ETF’s) that are not covered by the current 10% single stock circuit breaker, if they move 30% and the stock is over $1 (needs to be 50% if the stock is under $1).

Now we know the exchanges have been very busy trying to merge with one another, but we have to really question what they are doing over there.  Don’t they realize that by adding more circuit breaker levels that they are just confusing the public even more?  Don’t they realize that confusion leads to lack of confidence.  And at a time when they just lost the poster boy stock of HFT (Citigroup) to a reverse split, they should not be confusing investors because their volumes may just suffer even more.

We know that many exchange executives occasionally take a peek at our blog (hi Ray), so if you are reading this, think about what you are doing and take a step back.   For the sake of investor confidence, try to see the forest through the trees.